As Brexit Negotiations Are Finely Poised, The Economic Picture Doesn’t Get Any Less Gloomy

Anton Muscatelli | 3 December 2017

Edinburgh Financial District, This Is Edinburgh, CC-BY-2.0

Over the last year and a half, I have written extensively about what I see as the economic catastrophe that Brexit will potentially deliver.

Until now, many on the Leave side have sought to downplay what I and others have said as simply the sour grapes of those who argued passionately for Remain. But recent announcements of the relocations of the European Medicines Agency and the European Banking Authority from the UK along with the tens of billions of euros that the UK is almost certainly going to commit to paying on exit, suggests the warnings made were – if anything – conservative.

The state of play on the first phase of the negotiations is finely balanced. It’s clear from the mood music in both the European Commission and the EU Council that the UK government has shifted its position sufficiently on both the divorce settlement and on citizens’ rights to persuade the EU27 to move to phase two of the negotiations. As Charles Grant recently emphasised, the ‘negotiations’ have been more of a capitulation to the EU27’s terms in these two areas.

The only obstacle in the way of progress to phase two of the talks are the concerns on the Irish border. As I am writing this, Donald Tusk has been reassuring Ireland that the EU27 will not ignore their concerns. It’s not obvious how Irish concerns can be met given the UK’s government’s insistence that Brexit involves leaving the single market and the customs union. Comparisons which some observers have made, suggesting the Northern Ireland and the Republic’s border arrangements could be similar to the border between Sweden and Norway, are not particularly well-informed or reassuring. First, because, as Norway is in the single market, policing the EU’s customs border is relatively less complex. Second, because the Sweden-Norway border is still a customs border – which needs to be avoided in the Irish case. If a form of words is found to delay dealing with the Irish border issue later in the negotiations, then they will move forward in December. The situation is finely poised.

If it wasn’t clear already, it certainly is evident now that the UK as a whole is going to suffer badly from Brexit. By how much depends wholly on what lengths the UK government is willing to go to in order to mitigate the pain. For pain there will be.

At UK level, the devaluation in the pound caused a squeeze in households’ real incomes and spending, and in November the Office for Budget Responsibility (OBR) noted that the economic slowdown started earlier than they expected eight months previously. The latest OBR projections on GDP growth for the next five years have also been lowered to reflect the impact of uncertainty (the long-term Brexit effects have not been changed by the OBR because they do not know what the outcome of the trade negotiations will be).

Impact on Scotland

Scotland faces some very specific challenges which have thus far been under-discussed – and the real risk is that we will be hit harder than some other parts of the United Kingdom. A major reason for this is our demographic challenge.

For generations, Scotland’s inability to maintain and sufficiently expand our population base has troubled policymakers and politicians alike. The desire to increase our numbers has never been seen as an end in itself, but rather as a means to stimulate economic growth, entrepreneurship and the delivery of sustained social benefits for all.

In recent years, progress has been made with an all-time record population now noted at 5.4 million. But here’s the rub. Much of the increase is down to inward migration from other parts of the EU. Talented individuals who have sought to make Scotland their home, on either a temporary or increasingly a permanent basis.

More than 180,000 EU nationals were resident in Scotland in 2015 – 3.4% of the total population, yet accounting for 4.9% of the total workforce – significantly higher than their population share. These individuals, and their families, contribute massively to the skills base, as shown in detail in the Scottish government’s evidence submission to the Migration Advisory Committe. They pay taxes which help sustain and deliver vital public services in health, education and transport. If that is important now, it will be even more so when Holyrood starts to flex its tax-raising powers.

An argument that has been much advanced over the past several years is that the presence of EU nationals has had a debilitating effect on wage levels for UK workers. That is simply not true.

A study from the London School of Economics demonstrated conclusively that there is no link between changes in the real wages of UK nationals and changes in immigration – wages of UK-born workers changed at much the same rate in areas with high immigration as in areas with a low rate of foreign born workers.

The LSE paper does indeed suggest that there is a correlation between immigration and unemployment of UK-born workers – but that it is a negative correlation: in areas with higher immigration, there has been larger falls in unemployment for those born in the UK than elsewhere, between 2008 and 2016.

A responsible discourse on migration, wage levels and national well-being should now focus on the positive economic, social and cultural impacts that EU nationals have brought to the United Kingdom, and more particularly to Scotland. Unless there is a serious shift in rhetoric and policy, and within that a willingness to consider a differentiated deal on immigration for Scotland, we face the real possibility that the important progress on population growth will be reversed. The impact of that on our economy, our tax take and our ambitions for society could be disastrous.

In higher education, an area I am very familiar with, the prospect of Brexit is a depressing one. Not just in terms of the numbers of non-UK EU nationals that are attracted to our campuses, enriching them and contributing vibrancy and energy. But the impact that EU withdrawal might have on the freedom of movement and freedom of ideas that are the very lifeblood of universities. Indeed, it is concerning that we are seeing signs that the latest data from UK participation in Horizon 2020, the EU’s research funding programmes, show a decline in both participations and funding received compared to the previous report.

The UK government devoted much of its recent – and very welcome – industrial strategy document in looking for answers to the UK’s productivity problems. Unlike past attempts at developing an industrial strategy, this one has traction, largely because the potential impact of Brexit on productivity and growth is seen as an imminent challenge.

A simple and obvious solution would be to allow for a rational and open immigration policy, or at least a debate on the positive impact on the UK’s skills base, and the differing needs on a geographic basis, of different countries and regions in the UK. The industrial strategy will depend on its success in harnessing not only the skills of those who currently resident in the UK (and retaining the skills base we have), but also making ourselves more, not less, attractive to skilled immigration.

By reinjecting the principles of rationality into public policy – beginning with Brexit – we can perhaps start to tone down the inevitable pain that will come with Brexit. Failure to do so will simply make a bad situation worse – and could set our economy and society back for generations to come.

Anton MuscatelliAnton Muscatelli | Twitter

University of Glasgow

Prof Sir Anton Muscatelli is Principal and Vice Chancellor of the University of Glasgow. He is Chair of the First Minister of Scotland’s Standing Council on Europe and Advisory Board Member of the Scottish Centre on European Relations.